Supervising defined benefit (DB) transfers has been a key priority for us since the pension reforms, commonly known as the ‘pension freedoms’, were introduced in 2015. We summarise our work to date and how we continue to supervise this area. We also clarify the change in permission resulting from changes to the glossary definition of pension transfer.
Defined benefit pension schemes provide members with a guaranteed income in retirement, which we consider important and valuable benefits for members of these schemes. Advice on whether to transfer a DB pension is complex and requires specialist resources. Since the 2015 pension freedoms, advice in this area has been mandatory for any transfer with a value over £30,000.
For most consumers it’s not in their best interests to transfer out of a Defined Benefit (DB) pension. Where a consumer seeks advice to transfer, firms must give suitable advice that is personalised to their needs and situation. If advice is unsuitable, consumers can suffer harm. Some may end up with less money in retirement, with no guarantee about the amount of income available at retirement. If we find a firm is not meeting our expectations, we will take action.
Given the high risk of consumer harm associated with unsuitable advice to transfer, we thoroughly check applications from new entrants to the DB advice market. We test the robustness of firms’ systems and controls and we ensure the competence of individuals seeking approval. Particularly for pension transfer specialists, or those who previously held oversight roles such as Senior Manager Functions. We will apply this approach at all gateway entry points, including for new firm or individual authorisations, variations of permission, appointment of Appointed Representatives (ARs), or changes in controllers.
Our assessment involves checking a firm’s or individual's past conduct and involvement in advising on pension transfers. We will review the intelligence we hold on firms and individuals who have previously provided pension transfer advice. Firms applying for new pension transfer permissions will need to provide details regarding the suitability of their past advice, their past conversion rates, particularly where dealing with insistent clients, and any past complaints.
If authorised firms are applying for individuals or appointing ARs to join their firm, they will need to carry out thorough due diligence on their past DB activity before submitting an application. The Senior Manager with accountability for the fitness and propriety of those holding approved functions should have oversight of the due diligence undertaken before putting candidates forward for approval.
Firms will need to demonstrate how the DB pension transfer advice and associated services fit with their overall business model and target market. They will also need to provide evidence that they are able to secure adequate professional indemnity insurance cover. We will scrutinise firms’ financial and non-financial resources in accordance with the threshold conditions, to ensure that they have a viable business model.
As part of our assessment and in conjunction with our strategy on phoenixing, we will also identify and stop firms and individuals seeking to avoid past conduct liability claims by reinventing themselves, either as different firms, or by joining already authorised firms.
Our approach intends to minimise consumer harm. We might request additional evidence to demonstrate the suitability of both firms and individuals to conduct DB pension transfer business.
As part of our ongoing review into defined benefit (DB) transfer advice, we developed a tool to assess the suitability of advice provided by firms. We used the DBAAT in the latest phase of our review assessing the suitability of DB transfer advice.
We published the DBAAT to help firms and pension transfer specialists understand the FCA’s file review methodology for DB transfer advice. It may also be of interest to other stakeholders with an interest in DB transfer advice, including:
- providers of professional indemnity insurance who want a better understanding of how the FCA assesses DB transfer advice
- compliance consultants who want to be better able to support firms responding to FCA reviews
- trustees and sponsoring employers of workplace pension schemes
Your right to use the DBAAT is subject to the terms of the FCA’s DBAAT Licence Agreement. Please read the Agreement carefully before accessing or using the DBAAT. By accessing the DBAAT link – maroon button below – you confirm your acceptance of the terms of the DBAAT Licence Agreement.
We recommend that you use the current DBAAT to assess your past advice, for example if you receive any complaints about the DB transfer advice you gave or as part of carrying out a past business review. This DBAAT sets out the key factors to consider when checking the suitability of advice and disclosure, thereby allowing firms to understand what is expected.
Firms can use this DBAAT to assess the suitability of DB transfer advice and the adequacy of client disclosure they gave before October 2020. This DBAAT does not incorporate the new rules which came into force on 1 October 2020.
We will soon publish an updated DBAAT for use for DB transfer advice they gave from 1 October 2020. We will also publish the Finalised Guidance to GC20/1 which will help firms understand what we expect from them when they give DB transfer advice. We aim to publish these in the coming months.
Refer to our instruction guide and explainer videos, below, to help you understand how to use the DBAAT or interpret the results from an FCA file review.
- Introducing the DBAAT
- Approach and rules
- Using the assessment tool
- Completing the information tab
- Completing the suitability tabs
- Completing the insistent client tab
- Completing the disclosure tab
- Completing the causation tab
- Completing the summary tab
We published updates on our work in 2017, 2018 and June 2020. We have conducted specific work into advice provided to members of the British Steel Pension Scheme.
We have taken significant action where we consider that firms have not met the standards of advice and behaviour expected for financial advice. Where we suspect serious misconduct we have opened enforcement investigations.
The DB transfer market is significant in terms of both the number of people and monetary values involved. In 2018, we issued a data request to all firms with pension transfer advice permissions. Our high-level findings are published in our market-wide data results reviewing DB pension transfers. This data enabled us to build a more comprehensive picture of the pension transfer advice market: advice was provided on £82.8bn of transfers, with 162,047 members being recommended to transfer their pension.
This data gives us the information we need to focus our continuing supervision of firms and drive up the quality of advice. By focusing on firms where the risk of poor practice is highest, we can prevent consumer harm in future. We can do this by working with the firm, or stopping it carrying out activities until our concerns are resolved. It may also involve more formal action if that is required.
We are also working to improve understanding of the DB pension transfer market. This will include working with firms, market-wide campaigns, and industry seminars and meetings with key people and organisations.
Our rules and guidance provide a framework through which suitable advice can be given, however we will not hesitate to take action where firms have not heeded our messages and are presenting harm to consumers.
The Handbook definition of pension transfer has changed and from 1 October 2020 refers to transfers of safeguarded benefits to flexible benefits in a different scheme, plus some transfers of safeguarded benefits to other safeguarded benefits. As a result, the regulated activity of advising on pension transfers and opt-outs now covers only transfers of this type.
The non-standard limitation has changed to reflect this and firms should use this revised wording:
- short description: limited pension transfer activity
- long description: This activity is limited to the provision of advice on the conversion or transfer of benefits from pension policies with a guaranteed annuity rate
Regulated advice under FSMA on transfers from defined contribution occupational schemes without safeguarded benefits is now covered by the activity of advising on investments (except on pension transfers and opt-outs).